The Shift From Growth To Value

Over the past 12 months, growth stocks have delivered nearly five times the performance of value stocks. During the nine-year bull market growth stocks have outperformed value by about 50% as measured by the Russell Indexes.

But the tides may be turning.

Read the full note from Fidelity here: https://bit.ly/2vs3S5S

According to analysis from Fidelity Investments, valuations on growth stocks are significantly higher than value stocks. The price-to-forward earnings ratio for growth stocks is over 30 while value stocks have a forward P/E under 20.  

This seems to be thinking behind the most recent recommendations made by RBC Capital Markets. RBC’s equity strategy team has upgraded utility stocks on attractive valuations while downgrading more growth-oriented tech stocks.

“Major style shifts tend to happen late in or at the end of bull markets,” Lori Calvasina, RBC’s head of US equity strategy, wrote in a client note. “Earnings leadership is shifting from growth to value. Valuations look a bit stretched in growth relative to value again.”

Two Fidelity portfolio managers have also commented on this shift.

Matthew Friedman, portfolio manager of the Fidelity Value Strategies Fund, says “The US equity market looks fairly expensive, but that’s because I think growth stocks — one particular part of the market — are skewing the market’s price-to-earnings ratios higher.” Friedman is still finding good deals among high-quality value stocks. He remains focused on high-quality companies with strong competitive positions — which tend to hold up better in volatile markets.

Jeff Feingold, portfolio manager of the Fidelity Independence Fund, also believes it’s time to sell growth to buy value. Feingold says, “I’ve been trimming exposure to higher-priced, faster-growing companies and using the proceeds to buy what I think are cheaper stocks with improving fundamentals.” 

While growth could continue to outperform value, these periods of outperformance tend to be cyclical according to Fidelity Investments.

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Investors Have Gotten Spoiled By High Returns And Low Volatility

Things have been too good to be true for investors for the past few years. According to Fidelity Investments, “From March 2009 to January 2018 the S&P 500 gained 364%, generating a compound annual growth rate twice the historical average, amid much lower volatility.”

Volatility has come back and many investors are wondering what happens now. Fidelity director of global macro Jurrien Timmer says its time for investors to lower their expectations. The good news, according to Timmer, is that “over the long run, stock prices generally follow earnings, and earnings are going up.” However, there is plenty of bad news. Timmer explains in his recent note that valuations are under pressure from both tighter monetary policy and anti-trade policies. 

According to Timmer, stocks won’t necessarily suffer a major decline, thanks to strong earnings growth, but investors should lower their expectations. 

Also, investors should consider rebalancing their portfolios. Last week we spoke to the chief investment strategist of PGIM Fixed Income, Robert Tipp. He said the thing he is most worried about investors getting wrong is having an overallocation to equities as that part of their portfolio has grown. Analysis from Fidelity Investments makes this danger clear: “Since March of 2009, a hypothetical portfolio of 60% S&P 500 Index stocks and 40% bonds would have turned into a portfolio of 83% stocks and 17% bonds if it had not been rebalanced by now.”

Read the full note here: https://bit.ly/2Is4kTa

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What Can Rescue Stocks From A Trade War Disaster

US stock valuations are at historically high levels by most measures. According to Jurrien Timmer, director of global macro for Fidelity Investments, the possibility of higher trade tariffs could put pressure on valuations. Timmer writes, “Historically, tariffs levied on trade have been inflationary, and we know that there is a consistent inverse relationship between P/E ratios and inflation.”

Of course, when valuations compress, stock prices generally go down. Stock price is the numerator in a P/E ratio, so the relationship is baked in. Even though the correlation is strong, there are times when the total return on stocks has been positive, even as the valuation multiple declined. In fact, according to Fidelity’s analysis, this has happened 22% of the time over the past 100 years. Though, these periods, which he refers to as “benign valuation-compression regimes” require strong earnings growth.

Read the full note here: https://bit.ly/2GWl2eb

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The Countries And Companies That Anti-Trade Policies Will Hurt

Read the full note here: http://bit.ly/2tu2bE4

Last Thursday President Trump announced that the US would impose new tariffs on imports of steel and aluminum. This caused US stocks to sell off broadly, while shares of the largest US steel makers got a small boost. The initial market reaction was small compared to the potential larger consequences of these policies. According to a recent note from Fidelity Investments, “the broader issue is the potential of escalating anti-trade policies globally, which could slow, or even reverse global economic growth and spur inflation.”

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Here’s What Caused The Market Pullback

Find the related analysis from Jurrien Timmer here: http://bit.ly/2Ggs63C

Jurrien Timmer, director of global macro for Fidelity Investments, published his analysis following the recent US stock market pullback. According to Timmer, the recent pullbacks were the result of 2 market imbalances. ONE imbalance was caused by the stock market gaining twice as much as was justified by the recent tax cuts. THE SECOND imbalance was the stock markets lack of attention to the sharp rise in bond yields. 

Timmer says the market is now in much better balance, with strong earnings growth pushing the market higher, but higher rates acting as a headwind for valuations. Meaning stock prices should rise less than earnings growth, not more than earnings, as they have for several years.

With double digits earnings growth He believes this is still a bull market scenario, though a late cycle one.

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Here’s What’s Behind The Market Pullback

Find the related analysis from Jurrien Timmer here: http://bit.ly/2FVJn20

Jurrien Timmer, director of global macro for Fidelity Investments, published his analysis following the recent US stock market pullback. According to Timmer, “The reason for the sell-off seems simple enough: The stock market has finally started to pay attention to the bond market again.”

Timmer says that before the recent meltdown, markets ignored this very important part of equity valuations bringing back memories of 1987 — when the stock market rallied while bond yields were rallying until stocks crashed on “Black Monday.”

According to Timmer, last week’s drop happened despite an increase in the consensus earnings estimates for 2018. Which he says has more logic than it seems.

“But in a way this is quite logical, because amid the euphoria of rising corporate earnings it has been clear that both the equity and bond markets were being too complacent about the other side of that trade: tax cuts could push the economy toward the overheating phase. If that happened, the Fed would likely raise rates with implications for interest rates in general.”

This may not be all bad news. Timmer says that it is better for the stock market to rates now “rather than keep ignoring them and suffering a much worse fate later, as it did in 1987.”

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THE BOTTOM LINE: Gary Shilling on expensive stocks and Alibaba vs. Amazon

This week:

Alibaba has been one of the best-performing mega-cap stocks of the year, surging 100%. Most recently, they had a blockbuster quarterly earnings report, and hedge fund manager David Tepper took a large stake in the company. It’s is now closing the gap on Amazon, another rapidly-growing tech giant. Business Insider executive editor Sara Silverstein compares the two companies, then discusses just how high Alibaba’s stock price can go as it attempts to expand more into international markets — which is when it’ll start to compete more directly with Amazon.

Silverstein discusses the views of Jurrian Timmer, the director of global macro at Fidelity Investments, ahead of this weekend’s Jackson Hole economic symposium. Timmer says that right now, the Federal Reserve and the market have differing views on how the schedule of rates hikes will unfold.

Dr. Gary Shilling, the president of A. Gary Shilling & Co., spoke to Business Insider CEO Henry Blodget about how the market is in the process of working off the excesses that built up in the 1980s and 1990s, and breaks down a market forecast he nailed several years ago. He says that we haven’t seen income growth, which is putting a lot of pressure of politicians to do something. While monetary policy hasn’t done the trick, he predicts that massive fiscal stimulus is in the cards, and says that it’s the one thing in the Trump agenda that’s actually going to happen. Shilling goes on to break down his economic growth forecast which he also ties to fiscal stimulus, then discusses how tech innovation creates productivity. A bit later, he breaks down his views on wages and the labor market, and how he doesn’t necessarily agree with the Fed’s view that the economy is due for an explosion in wage inflation.

Shilling discusses the stock market, which he views as expensive, citing the Shiller P/E ratio, which is roughly 40% above its historical norm. He doesn’t necessarily see them falling apart, but says they’re starting at a high level. Shilling shares his thoughts on the end of the eight-year bull market, saying that some sort of exogenous shock could derail it, as well as tightening from the Fed. He notes that, since World War II, tighter Fed conditions have resulted in a recession 11 out of 12 times. He does say, however, that this could come at some point much further down the road.

Shilling breaks down his forecast that the 10-year US Treasury will go to 1%. He notes that we’re likely to see deflation than inflation, which is beneficial to his forecast, and also highlights that US yields are higher than any other industrialized nation.
Shilling provides his thoughts on online shopping, which has says could ultimately hurt retail, because 50% of purchases are impulse buys, which only happen in brick-and-mortar stores. He notes that Amazon is trying to do this, but haven’t yet seen much success.

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Business Insider is the fastest growing business news site in the US. Our mission: to tell you all you need to know about the big world around you. The BI Video team focuses on technology, strategy and science with an emphasis on unique storytelling and data that appeals to the next generation of leaders – the digital generation.